Either Jeff Currie, head of commodities at Goldman Sachs Group Inc (NYSE:GS), is desperate, or he’s a contrarian genius. He’s once again declaring “Sell gold, short gold,” to the CNBC audience last week during an appearance on Power Lunch. “Market is pricing in one rate hike for this year, the Fed has signalled two, data is signalling three. You put that together, the market needs to trade interest rates higher. What do higher interest rates typically do to gold? Send it down,” he said.

Currie is widely regarded by gold watchers since his quoted headline “Goldman Sachs: Short Gold!,” published in the Wall Street Journal almost three years ago to the day catalyzed a 15 per cent one day drop in the gold price and marked the end of the gold bull market that began in 2001.

Courtesy of StockCharts.com

But his calls — and those of other gold bears — appear to be falling on deaf ears, since he reiterated that call in August 2015, and again in November 2015. Since the end of December 2015, gold has gained 16 per cent in U.S. dollar terms. Persistent selling by futures traders is met with patient buying by (mostly Chinese) investors, and as oft-state here since January, the gold price lows are still getting higher, and the highs continue to reach new peaks before correcting.

We shouldn’t be surprised that Goldman Sachs — or any other commodities market trader — has it wrong. After all, one need look no further than the oil price and the dearth of predictions warning of an imminent price crash before prices actually crashed in August 2014.

At the Financial Times Commodities Summit in Lausanne, Switzerland last year, many “pro” traders stated back in April 2015 that commodities had bottomed. If one allows for 8 months of latency, we could say they were right — in the case of precious metals and zinc.

But looking at the chart below, it is obvious that not all commodities are created equal — and in fact, the word “commodities” is misleading, in that it implies that all commodities trade in tandem as a group. But commodities, as a sector, are as differentiated as, well … apples and coal. The fundamentals driving the prices of food commodities are significantly different than those driving precious metals, or industrial metals, or aggregates, or frac sand, or oil.

In the current global economy, the diminishing reward of holding sovereign debt is one of the primary reasons that precious metals are persistently trending ever more strongly higher. One of the main criticisms of gold has always been that it offers no yield. But relative to G7 bonds, at least its yield is not negative. So gold and silver especially are starting to make a whole lot more sense than bonds to hold, and so even the most conservative portfolios appear to be weighting higher in favour of precious metals.

More so now than at any point in the last decade, with sovereign debt loads at all time highs, gold as a hedge against currency debasement is making perfect sense. The loser in that argument is Keynesian economics, anchored by deficit spending. What we are now learning on a scale that I sincerely doubt Keynes ever contemplated or would have supported is that there is a diminishing rate of return on deficit spending that actually constitutes incrementally increasing risk in direct proportion to the rate at which quantitative deficit spending is undertaken.

So while commodities as an asset class will seldom move uniformly across the commodity type mix, the monetary metals, which are arguably mislabeled as a commodity (think about it … applying the word “precious” to a “commodity” is an actual contradiction) are historically seen to be in favour in times of geopolitical instability, and when confidence in fiat currencies ratchets higher.

Increasingly, the concept that the two sole tools of central banks — fabricating money and tinkering with interest rates — are at the maximum limit of any ameliorative effect they can have on the economy is pointing more and more towards gold, silver and platinum. But those are the only “commodities” that should be attractive at this juncture.

Industrial metal commodities, whose supply and demand metrics are directly and exclusively tied to global GDP, are likely to either continue heading lower or remain flat, as spreading fears about sovereign debt and its ability to generate even synthetic economic growth results in less construction globally.

James West is an investor and the author of the Midas Letter, an investing research report focused on small cap companies. The views expressed here are his own and are presented for general informational purposes only — they should not be construed as advice to invest in any securities mentioned.

James West and/or associated funds do not own shares in any securities mentioned in this article. For the full Midas Letter disclosure policy, click here. Postmedia and Midas Letter have a revenue sharing arrangement.

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